Issue 110 April 2017 Lite

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APRIL 2017

Issue 110

ASIAN PRIVATE BANKER Independent, Authoritative, Indispensable

A s i a’ s T o p 2 0 P r i v at e B a n k s

by AUM

I NSI DE

Industry: LGT’s “lofty” targets amidst ABN AMRO integration

Industry: 2016 RM Headcount League Table

Industry: AUM per RM up in 2016

APB Mandate: Gold allocations to ‘gain momentum’ in Asia this year

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CONTENTS 4

ISSUE 110

April 2017

Letter from the Editor

5 Echo Chamber

Industry

Changing of the guard at BNP Paribas Wealth Management APAC 6 Industry

LGT sets “lofty targets” for closure of ABN AMRO deal 7 Technology Julius Baer in “early stages of planning” for mobile banking platform in Asia 8 APB Mandate Asian HNW investor demand reaches new high for Morgan Stanley PWM

CEO Andrew Shale Editor Sebastian Enberg Editorial Richard Otsuki Priyanka Boghani Nick Hedley Charlene Cong Alice So Managing Director Paris Shepherd Business Development Madhuri Chatterjee Sonia Lam Sam Chan Joanne Tse Stacey Wong Kale Law Olaide Ogungbesan Eldar Gainutdinov

Digital Tristan Watkins Yiyang Zhou Cécile de Buor Wilfred Lam Evy Cheung Jacqueline Lau Gloria Fan Alice Wong Samuel Chen Events Koye Sun Gigi Lam Finance & Operations Karman Wu Jessie Cheng Martina Ngai Production DG3

Published by Key Positioning Limited 13B Greatmany Centre 111 Queen’s Road East Wanchai, Hong Kong Tel: +852 2529 1777 Fax: +852 3013 9984 Email: info@asianprivatebanker.com ISSN NO. 2076-5320

9 Technology AI’s ‘black box’ methods stir scepticism among PB experts 12 Industry

2016 AUM League Table 14 Industry

2016 RM Headcount League Table 16 Industry AUM per RM up in 2016, Goldman Sachs PWM tops the table 17 Regulations MAS gets tough on AML, launches partnership with local police 20

APB Mandate Gold allocations to ‘gain momentum’ in Asia this year

23 APB Mandate AM Heat Map: Fixed income fund traffic tilts towards Asia and EM 25 Regulations

SFC launches ‘manager in charge’ programme Singapore regulators likely to become “more active” in AML space, says law firm 26

People Moves Movers & Shakers

LETTER FROM THE EDITOR

T

he difficulty with rankings is that they establish a hierarchical relationship between constituent elements that do not necessarily lend themselves to direct comparison. This is especially true when it comes to Asia’s private banks, whose propositions and models vary markedly and whose respective viability in Asia cannot (and should not) be inferred from a single scale-based ranking.

Still, our annual AUM and RM Headcount League Tables provide the clearest available picture of an industry whose fundamentals remain strong but whose growth trajectory has been complicated by a convolution of tail and headwinds, stirred up by increasing competition from non-traditional players, compressed margins and regulatory tightening.

The heartening news is that total client assets managed by the region’s Top 20 (ex-onshore China) grew in a difficult 2016 to US$1.55 trillion after contracting in 2015. Just how this was achieved during a year when markets were uncooperative and clients less willing to trade can be distilled down to three observables.

First, growth came on the back of M&A activity and heavy hiring (Julius Baer added 116 RMs net, primarily in Asia, while Bank of Singapore’s acquisition of Barclays WIM in Asia drove a 16.4% YoY increase in AUM). Indeed, a private bank that pursued an inorganic growth strategy in 2016 increased its client assets in Asia by an average of 48.9% YoY (a figure bolstered by the UBP-Coutts deal), whereas banks that relied on organic growth strategies increased their AUM by an average of 5.1% YoY. Second, those banks that were able to leverage upon their IBD to deliver ‘one bank’ solutions to private clients were better-placed to ride out a downturn in transactional volumes in 2016.

Third, private banks with strong recurring revenue streams were relatively insulated from the transactional slump and, accordingly, grew their book size.

But that was last year.

2017’s market ebullience has breathed some much-needed life into the industry to the extent that some players are claiming record quarters. Stay tuned for our Q1 wrapup coming soon. Till then, feel free to reach out to me with comments, questions and quotables at editor@asianprivatebanker.com.

Cheers,

Sebastian Enberg Editor Asian Private Banker

Asian Private Banker welcomes hard-working fast-learners to apply for our 2017 Summer Internship! If you want to learn more about the fast-growing private banking industry and work alongside the region’s foremost experts in private banking and financial journalism, forward us your resume and a cover letter to careers@asianprivatebanker.com by May 28th! We look forward to having you join us for this exciting journey!

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e ch o cham be r “The first quarter of 2017 has been an all-time record high in investment activities for us in Asia...Significantly improved fundamentals and investor appetite drove up transaction volumes across diversified investments.”

Ernest Chan, head of Asia investment management services, Morgan Stanley Private Wealth Management “Completion of the transaction is expected to take place in the second quarter of 2017, upon approval of the relevant authorities...preparation for a successful transfer is all on track.”

Spokesperson, LGT, on the progress of its ABN AMRO acquisition “I don’t see it as Singapore racing to catch up – the regulations are already there – but I think we will see more activity by the MAS [Monetary Authority of Singapore].”

Jo Pearson, partner, Simmons & Simmons, on AML enforcement “With our assets under management having doubled in the last six years, our aim now is to move from being one of the Top 10 players in the region to the Top 5.”

Vincent Lecomte, Co-CEO of BNP Paribas Wealth Management “For these kinds of business models [where the private bank shares a product platform with the retail banking business], pitching products that are scalable across all segments is often critical to success.”

An unnamed Hong Kong-based head of distribution of an American asset manager “We want to highlight the point that even if you’re not a licensed person or a responsible officer, by being directors of a licensed company and manager in charge of core functions, you are under SFC’s regulation.”

SFC spokesperson, on the launching of its ‘manager in charge’ programme

IN D U S T RY

Changing of the guard at BNP Paribas Wealth Management APAC Earlier this week, BNP Paribas Wealth Management made the sudden announcement that Asia Pacific CEO Mignonne Cheng was to step down, with another BNP Paribas banker, Pierre Vrielinck, taking her place.

Just how long Cheng would remain at the helm of BNP Paribas Wealth Management in Asia was a constant source of speculation, if only because Cheng, who has overseen the business since 2009 when it was “below the [group’s] radar”, was only going to hand over the reins when the time was right and not before.

At the time of Cheng’s appointment, the private bank in Asia was operating at an uncomfortable cost/income ratio of around 90% – by no means the highest in the industry but certainly at the upper end for a universal.

“I realised that the model we had in place was not sustainable,” Cheng told Asian Private Banker in August last year, before adding that the bank’s strategy had been to “maintain an efficient operating platform and onboarding new talent while upgrading existing resources”.

Since then, BNP Paribas WM has increased in scale, more than doubling its private banking assets under management (AUM) in Asia to reach US$64.5 billion at the end of 2015, according to Asian Private Banker data. Moreover, from 2012 to 2015, BNP Paribas WM’s client assets in the region increased at a CAGR of 15.1% – effectively double the industry (Top 20) average.

That momentum has sustained, as evidenced by the bank’s AUM total for end-2016, which came in at US$74 billion – representing 14.7% growth YoY, notwithstanding the difficult year that was 2016. The industry was hit hard by a sharp downturn in transactional volumes with some players experiencing as much as a 30% drop in brokerage volumes. Structured product trading volumes were also down across the board by 13.8%. BNP Paribas WM, along with other transaction-focused banks, would have been heavily exposed to these dynamics.

“Transactions account for about 75% revenue,” Cheng told Asian Private Banker, before explaining that the bank was actively working to build up its flat-fee business, including its discretionary portfolio management (DPM) offering. Currently, the average DPM penetration rate in Asia is 8% going by Asian Private Banker estimates, and BNP Paribas Wealth Management falls just shy of this number.

To be sure, much of BNP Paribas WM’s book in Asia is skewed towards the UHNW and entrepreneurial segment and, as with a handful of universals plying their trade in Asia, the private bank positions itself as a purveyor of the ‘one bank’ approach. One of Cheng’s most recent initiatives was to launch an über-ultra high net worth offering – branded ‘mega wealth’ – catering to clients with a minimum US$100 million in AUM with the bank and a minimum net worth of US$1 billion. BNP Paribas had around 100 clients that fit the criteria at the time Cheng shared details on the initiative with Asian Private Banker.

Vrielinck steps into the role having served as BNP Paribas WM’s head of Switzerland and emerging markets, and would seem to have big shoes to fill.

But this is clearly no like-for-like appointment given the legacy Cheng leaves (she will remain on as chairman).

What is certain is that Vrielinck’s Asian private banking foray kicks off at a time when the industry, facing squeezed margins, increasing competition from non-traditional players and regulatory tightening, is under immense pressure.

Cheng alluded to as much when she pointed out last year that BNP Paribas WM could no longer depend on the offshore centres of Hong Kong and Singapore to build the business, saying that the bank was, in turn, increasing its focus on Asia onshore.

“What I can say is that those domestic onshore markets – whether Taiwan, Indonesia or China – will be the new focus,” she said. “There is going to be a transformation.” Whether Vrielinck holds the same perspective remains to be seen.

ASIAN PRIVATE BANKER

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INDUSTRY

LGT sets “lofty targets” for closure of ABN AMRO deal To address any shortage in office space, the Liechtensteinian bank has rented additional space in Hong Kong to make room for new frontliners from ABN AMRO, sources indicate.

Asian Private Banker understands that most of the back-office staff from ABN AMRO Private Banking will sit in LGT’s Singapore offices, where office space is less of an issue.

And, as if the completion of an acquisition that involves the transfer of roughly US$20 billion in client assets in five months is not a challenge in and of itself, LGT also plans to have its Smart Banking app ready by the time ABN AMRO bankers have onboarded.

L

GT plans to complete a number of projects while simultaneously wrapping up the ABN AMRO acquisition by 1 May, sources close to the matter tell Asian Private Banker.

Over the past five months, the Liechtensteinian bank has been busy with the ABN AMRO acquisition which involves a transfer of client assets in Hong Kong, Singapore and the Middle East upon closing. At the same time, it is carrying out a hefty data migration process – an arguably tedious and time-consuming task – between ABN AMRO’s Temenos and Microsoft systems and LGT’s Avaloq system.

If all goes according to plan, the data migration will happen on the weekend of 29-30 April.

It is important to note that data migration projects typically commence once assets have been successfully transferred and rarely take place at the same time that a deal is announced.

For example, the migration of BSI’s business to EFG’s IT platform is expected to conclude almost a year after EFG announced that it had completed the integration of BSI’s Singapore and Hong Kong businesses.

LGT’s ABN AMRO integration involves onboarding roughly 40 bankers in Hong Kong and 45 to 50 bankers in Singapore from the offices of ABN AMRO Private Banking, according to insiders.

By these measures, the number of relationship managers at LGT in Asia will double from 106 (at the end of 2016) to 200-plus once the deal is done. In total, more than 300 staff will join LGT from ABN AMRO’s Hong Kong, Singapore and Dubai offices.

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The app – which will first be rolled out in Asia, and is the result of a three-year partnership with Avaloq – will enable clients to view and analyse their portfolios and view their transaction histories, among other functionalities. For its independent asset manager clients, the private bank will continue to use its LGT Class platform, Asian Private Banker understands.

Indeed, LGT seems to have its plate full, with the deadline just around the corner. However, industry sources say that those LGT staff who are involved in the acquisition have been in “overdrive mode”, working long hours with few allowed to take leave.

Experts on private banking acquisitions say that it is not unusual for acquiring banks to overshoot deadlines given the complexities involved, including those pertaining to logistics, operating between more than one jurisdiction, and differences in organisational culture.

Relationship manager attrition is commonplace during acquisitions, leading to the loss of potential client assets. Therefore, it is likely that the bank will be eager to complete the asset transfer and integration on time.

A successful integration would push LGT’s AUM to over US$40 billion in Asia and around US$140 billion globally, according to the bank.

When asked for comment, a spokesperson for the bank said, “We look forward to welcoming ABN AMRO staff and clients soon.”

Earlier this month, the spokesperson said that the “completion of the transaction is expected to take place in the second quarter of 2017, upon approval of the relevant authorities”. She added that “preparation for a successful transfer is all on track”.

TECHNOLOGY

Julius Baer in “early stages of planning” for mobile banking platform in Asia

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ulius Baer has launched a mobile banking platform in Switzerland with tech vendor CREOLOGIX, yet in Asia, the pure play is still in the “early stages of planning”, Asian Private Banker has learned.

In February, the Swiss bank went live with its latest mobile banking offering in partnership with CREOLOGIX, allowing clients to log into their online banking accounts using their smartphones. The login process uses a push authentication function instead of additional hardware tokens or access codes.

“Customers of Julius Baer only need their smartphone to use all banking functions on the app,” a statement from CREOLOGIX said.

“This enables them, for example, to carry out transactions or manage portfolios at any time and any location. In addition, the user will find all information amalgamated on the app.”

When asked about the rollout timeline for a mobile banking app in Asia, a spokesperson for the bank said “we’re in early stages of planning and there is nothing to add at present”.

App-happy Asia Deutsche Bank WM earlier this year became the latest private bank to launch a mobile or tablet app in Asia. The German lender went

live with its structured product app, ECQ Pricer, and RM-focused app, Spotlight.

The number of private banking apps increased in the region last year, according to Asian Private Banker’s App Map. Six private banks rolled out mobile/tablet apps in the region, bringing the total number of private banks with an app for RMs and/or clients to 14. This marked a 40% increase in the number of private banks with digital offerings since Asian Private Banker first surveyed the top 20 private banks in the region in May 2015.

Back-end boost Julius Baer first announced its platform renewal project in February 2015. The bank selected Temenos’ T24 to revamp its back office operations and to build “a scalable and highly automated IT platform”.

At the time of the announcement, Julius Baer said the tech revamp project would be launched in Asia first, since volumes represent close to 25% of the group’s business and “thus [Asia] serves as an ideal template for future implementation in other regions”.

Sources close to the project said that it would be completed by June 2017, however, the bank’s spokesperson declined to comment, saying only that the IT platform renewal project’s anticipated completion was in 2017.

ASIAN PRIVATE BANKER

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A P B M A N DAT E

Asian HNW investor demand reaches new high for Morgan Stanley PWM

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lthough investor sentiment remains mixed in Asia, Morgan Stanley Private Wealth Management managed to capitalise on improving fundamentals, posting its best-ever quarter in terms of investment activities, particularly related to fee-based activities.

the fixed income space, for example, investor outlooks were divergent on uncertainties about where yields will be in the short- to mediumterm—an issue exacerbated by Trump’s recent about-turns on Fed policy and Fed Chair Janet Yellen.

“The first quarter of 2017 has been an all-time record high in investment activities for us in Asia,” says Ernest Chan, managing director and head of Asia investment management services, Morgan Stanley Private Wealth Management.

“In fixed income, we are seeing polarised demand between floating rate bonds and CoCo [contingent convertible bonds] or perpetuals,” Chan says. “This is due to varying views about the long end of the yield curve.”

“Significantly improved fundamentals and investor appetite drove up transaction volumes across diversified investments,” said Chan, who would not share specific figures.

Until recently, markets were rallying in the wake of US President Donald Trump’s election, fuelled by his campaign promises that seemed to support sustainable reflation, including tax cuts and increased fiscal spending. The MSCI World Index (+6.53%) and the Bloomberg Barclays Global Aggregate Total Return Index (+1.76%) both posted positive returns in the first quarter amid recovering growth.

Diversified demand According to Chan, investors were deploying cash in the first quarter and demand was diversified across asset classes and market views. In

After bottoming out in July 2016 (at 1.36%), US 10-year Treasury yields reached the 2.5% mark twice (in December 2016 and March 2017) before recently declining to 2.25%.

Morgan Stanley’s record quarter spans beyond just fixed income – a sought-after asset class in Asia due to the incessant search for yield. The bank also experienced “a surge in demand” for equities in Asia, and observed particularly high interest in fixed coupon notes linked to US tech companies.

Besides long-only exposure, Chan is also seeing strong client interest in alternative strategies. But due to the “mediocre recent performance” of liquid alternatives, Asian HNWIs are shunning UCITS hedge funds for direct investments in traditional hedge fund vehicles.

Bloomberg Barclays US Inflation Linked Bonds TR May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Apr

295.0000

290.0000

285.0000 04/07 295.6843 Source: Bloomberg

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TECHNOLOGY

AI’s ‘black box’ methods stir scepticism among PB experts

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t’s no secret that financial institutions in Asia have been bullish about artificial intelligence (AI) for some time, with private banks in particular looking to new technologies to assist in data analytics and investment advice.

Yet, a camp of private banking tech heads and external vendors are growing more cautious about adopting an approach that relies on the so-called ‘black box’ method.

In the event of a miscalculation or an error, it can be extremely difficult to “interrogate” an AI system, an unnamed expert says, adding that this causes accountability complications and makes explanations for automated decisions nearly impossible.

“There’s an argument that deep learning and other complex learning approaches that use AI to automate decision-making can lead financial institutions into dangerous territories as AI systems are operating on their own,” says one former global tech head at a Singaporean bank.

“These computers that run on AI have programmed themselves and therefore even engineers who built the apps may not be able to fully explain the AI system’s behaviour.”

DBS’ IBM debacle Perhaps such sentiments are unsurprising to some in the industry, particularly when considering the results of the landmark deal between DBS Private Bank and IBM Watson in 2014.

The Singaporean lender partnered with the IT giant’s famed cognitive computer to analyse behavioural and market data and to arm its private bankers with a tool that churns out investment ideas for clients.

The project was held up in pilot phase and remained a “work in progress” for a few years before DBS CEO Piyush Gupta shut it down last year.

“Watson has not been 100% of what we wanted to do,” he told Business Times last April. “I was hoping Watson would be able to read any kind of unstructured information and make sense of it. It’s a little short. . . if I let it loose on let’s say Bloomberg . . . it’s not that good, because it gets confused with the terminology,” he said.

Gupta ultimately admitted that AI both excited and scared him.

AI catching on Still, AI in Asia is expected to transform the financial sector, among other industries.

A recent UBS report estimated that AI could generate economic value worth US$1.83 trillion per year by 2030 in the region. The Swiss lender also predicted that the widespread adoption of AI could put 30-50 million jobs in Asia at risk in the medium to long term.

On the funding side, investments by venture capital firms into AI continue at a healthy pace. Investments by venture capital firms in China reached record highs in 2016, according to a KPMG study published earlier this year.

And more specifically, a number of large- and medium-sized private banks have already started to explore AI, with many on the cusp of unleashing the technology’s potential, according to Rohitha Perera, vice president and senior partner at IBM Global Business Services, and Connie Leung, senior financial services industry director at Microsoft.

Private banks are in a trial-and-error phase, with many looking at implementing the technology in front, middle and back-end offices.

But the industry is certainly catching on and as it does, experts are beginning to question the opaque workings of machinelearning technology.

One expert says that AI systems need to be assessed on the quality of their responses and red flags need to be put in place when investment advice is misplaced.

“The fear is that once AI systems are well-fed, they will start to mirror and perfect human cognitive reasoning, spitting out investment advice that not even computer scientists will be able to back-track.

“By its nature, certain parts of AI may always remain a dark black box.”

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A d v e r t o r i al

Investing in ideas and not asset classes in a world of uncertainty

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he global economy is undergoing a profound transformation that includes shifts in political, social and ideological regimes, thereby demanding new means of investing beyond conventional asset allocation. Changes and divergences among markets, regions, countries and sectors have produced dislocations and, accordingly, opportunities for an approach that Invesco calls “Investing in Ideas”. It is this approach that has enabled the global asset manager’s Multi Asset team to meet its return and volatility targets since launch three years ago.

“We are beginning to shift into a different regime, which is creating greater uncertainty for markets,” says Invesco’s Product Director for the Multi Asset team, Clive Emery, pointing to fundamental global shifts.

Some major central banks are beginning to tighten monetary policy while governments are increasingly attempting to fiscally stimulate their economies; populism is emerging across the world and its social impact has yet to be truly felt; and it would appear that the tremendous post-war project to expand international trade is under threat.

“Government policies are starting to diverge and 40 to 50 years of globalisation is facing the risk of a reversal,” Emery adds.

Boom or bust, this immense global regime shift is widely expected to ripple through markets and create dislocations for investment

opportunities. Capitalising on such opportunities demands rigorous examination of the long-term themes that are likely to play out in markets combined with the experience to know how to access them.

Moreover, they are not always visible to top-down asset allocators that may be preoccupied with reading macro trends and predicting market direction - an increasingly difficult task.

Invesco’s strategic approach to “Investing in Ideas” includes a macro thematic portfolio of typically 20 to 30 high conviction investment ideas, which they believe will play out during their two- to three-year investment horizon.

Ideas can come from any asset type, anywhere in the world, but the key is in building a truly diversified, risk-managed portfolio of ideas that can provide positive returns in all market conditions. Invesco’s ideas currently encompass a number of opportunities from Asian markets, hoping to capitalise on selected opportunities in Asian equities, the potential for implied equity volatility to rise in the region and a number of relative value ideas among regional currencies.

Asian volatility expected to rise Loose monetary policy was a major tool the previous regime relied upon for global growth. An expansion in money supply was significantly aided by the unprecedented exercise of quantitative easing (QE).

“The increase in money supply has led to huge amounts of monetary flow into assets such as credit, government bonds, and equities,” says Emery. “One of the major effects prolonged QE has had on markets is the suppression of volatility and Asia has been no exception to the rule.”

“Volatility in our fund is seen as an asset class that we can also use to express ideas through,” Emery explains. “In a fund that aims to lower risk through diversification having a range of different ideas with different styles, different geographical exposure and across different asset classes is very beneficial.”

Any reversal in major central banks’ monetary policies could undo the dampening effect that QE has had on equity volatility, and the Investment team believes turbulence in Asia will increase relative to US markets. While such dislocations can create opportunities for those with the acumen to spot them, investing in them is by no means simple.

Emery is cognisant of the tail risk of persistently low volatility, whether due to accommodative central banking policies or a smooth transition to cyclical growth, but this does not derail the idea’s outlook, given

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A D VER V E R T ORI ORIAL

that it invests on the basis of the relative volatility between markets and is not impacted by broad directionality.

Finding opportunities in emerging market currencies In Asia, local currencies are expected to broadly underperform against a US dollar driven higher by a Federal Reserve that signals its readiness to normalise rates. To this point, the market agrees. But how will levels of weakening vary from currency to currency?

In its basket of various macro themed ideas there are a number of currency ideas, one is a relative value trade between the Indian rupee (INR) and the Chinese yuan (CNY), in which the team expects the rupee to strengthen relative to the yuan.

“In India, the economy is strengthening and meaningful reforms are being made, such as the recent removal of lower denominations of cash notes to help increase tax income,” Emery comments, highlighting reports that just 3% of the population pay taxes.

“We continue to believe that the approach of the current government, in addition to deregulation, will lead to strong growth and effectively a stronger rupee. With the INR often behaving like a USD proxy, rising US rates and a stronger dollar will make additional boosts.”

In contrast, the yuan is expected to maintain its southbound trajectory amid structural changes to China’s domestic economy.

“When we first took a negative view on the yuan, we believed that the currency was still too expensive and was due for devaluation,” Emery recalls. “Since then, Chinese authorities have happily accepted a slow and steady devaluation of the currency, which has seen our idea perform well.”

This weakening could be intensified by trade protectionism on the back of rising nationalist sentiment. Rhetoric from the newly elected US president points to the rising risk of a trade war with China, and the most significant tail risk could be a large-scale devaluation of the yuan.

Philosophical edge In addition to the robust success rate of Invesco’s investment ideas, the approach is imbued with a focus on risk. Indeed, the team’s risk management culture is best illustrated by two major points.

First, investments into the strategy’s ideas are equally weighted.

This allows for a thorough diversification of risk, while performance is not dominated by one or two trades. Second, and perhaps more importantly, the Invesco Multi Asset team’s strategy has dual targets – returns and risk: achieving a gross return of 5% above cash annually while limiting the volatility to less than half that of global equities, both over a rolling, three-year period.

There are significant implications that stem from this model, especially when Invesco’s targeted returns strategy is compared to competitors’ absolute return strategies.

Indeed, managers of absolute return strategies are often incentivised to maximise returns, meaning that investors are also exposed to the downside of potentially aggressive risk-taking that goes hand-in-hand with a “win big or go home” mentality.

By contrast, Invesco’s approach enforces a balanced culture of measured risk-taking; and this, says Emery, captures the essence of Invesco’s targeted return strategy.

This document is for informational purposes only and does not constitute an offer or solicitation of any investment advisory services in any jurisdiction in which such an offer or solicitation is not authorised or lawful. Investment involves risk. Please review all financial material carefully before investing. The opinions expressed are based on current market conditions and are subject to change without notice.

ASIAN PRIVATE BANKER

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INDUSTRY

2016 AUM League Table Asia’s (ex-China onshore) private banks rediscover growth momentum despite difficult 2016 Asia’s (ex-China onshore) Top 20 private banks by assets under management (AUM) collectively managed a record high US$1,554.4 billion of the region’s wealth at the end of 2016, according to Asian Private Banker’s 2016 AUM League Table. This marks an increase of 6.1% on 2015’s total of 1,464.4 billion and also recaptures past growth momentum after a 4.7% contraction in 2015.

The record high total was achieved despite a challenging market environment and regulatory tightening. Asia’s (ex-China onshore) private banks faced a sharp downturn in transactional revenues as clients shied away from uncertain markets. Some private banks saw as much as a 30% decline in brokerage volumes and structured product trading volumes were down 13.8% across the industry before the US election. Indonesia’s tax amnesty stimulated outflows from banks with Southeast Asian exposure and account regularisation was widespread in anticipation of the OECD’s Common Reporting Standard regime, which comes into effect in Asia in 2018.

UBS Wealth Management retains its top ranking with US$286.4 billion in AUM and the Top 5 grouping of UBS WM, Citi (incl. Gold, Private Client and Private Bank), Credit Suisse Private Banking, HSBC Private Bank and Julius Baer remains unchanged in terms of positioning (although total client assets managed by the Top 5 increased by 4.5% YoY).

Even so, AUM growth at Asia’s private banks (ex-China) is not keeping pace with high net worth (HNW) wealth creation in the Asia Pacific region. Whereas the Top 20 increased their collective AUM at a CAGR of 6.5% (2012-2016), the region’s HNW wealth increased at a CAGR of 13.1% over the same period, with China and Japan driving this growth.

Chinese investors are becoming more cognisant of the importance of international diversification; still, most Chinese wealth remains locked onshore to the benefit of domestic private banks and wealth managers.

Since 2012, the average AUM held by China’s Top 5 private banks (CMB Private Banking, ICBC Private Banking, BOC Private Banking, ABC Private Banking and BoCOM Private Banking) has increased at a CAGR of 27.0%, while the average AUM held by Asia’s (ex-China) Top 5 has increased at a CAGR of just 6.4%.

The biggest movers in 2016 were those banks that completed acquisitions. A private bank that pursued an inorganic growth strategy in 2016 grew its client assets in Asia by an average of 48.9% (although this figure is amplified by the Union Bancaire Privée-Coutts deal). Bank of Singapore (US$79 billion) climbed four spots to seventh on the back of its purchase of Barclays Wealth and Investment Management in Hong Kong and Singapore and Union Bancaire Privée, a new entrant in 2016, grew its AUM from US$774 million in 2015 to US$11.8 billion. LGT, which late last year announced that it would acquire ABN

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AMRO’s private banking business in Asia and the Middle East, expects to increase its AUM to US$40 billion.

By comparison, banks that depended on an organic growth strategy increased their client assets by an average of 5.1% YoY. Notable outliers are BNP Paribas Wealth Management (+14.7%), Goldman Sachs Private Wealth Management (+18.6%), UOB Private Bank (+23.1%) and LGT (+14.6%). Deutsche Bank Wealth Management, which endured a tumultuous 2016 both at the group level and regionally with the exits of key leadership figures, posted an 11.7% drop in Asia AUM to US$47.4 billion.

Pure play private banks grew their AUM at a faster clip than their universal counterparts, with four out of six pure plays in the Top 20 involved in M&A deals in 2016 (LGT expects to see a boost to its AUM in 2017 as a result of its ABN AMRO acquisition). In total, pure plays increased their collective book by 25% YoY to US$239.6 billion, while the private banking arms of universals grew by 5.4% YoY. Asian private banks also outdid their international peers with the former notching up 20% YoY growth versus the latter’s 5.6%. While Bank of Singapore enjoyed the largest boost to AUM as a result of its Barclays acquisition and a referral deal with DZ Privatbank (+43.6%), Singaporean rivals DBS (incl. Treasures Private Client and Private Bank; +8.3%) and UOB Private Bank (+23.1%) also beat the international average.

Ones to watch China Merchants Bank Private Banking CMB Private Banking may be an onshore behemoth with an estimated US$239 billion in AUM, but the Chinese wealth manager is only now starting to make serious moves in Asia offshore and beyond. It will open a private banking centre in Singapore this month to complement its operations in Hong Kong and Luxembourg and a private banking centre in New York. Its low cost/income ratio and a group-wide determination to convert sticky onshore relationships into a sustainable offshore business, underpinned by a more mature approach to asset allocation, makes this Chinese private bank one to watch.

HSBC Private Bank Notwithstanding global compliance issues, HSBC Private Bank – the true first mover in terms of banking Asia’s entrepreneurs – appears to be in revamp mode and is looking to exploit group-wide synergies in its ‘pivot to Asia’. The bank has already pinpointed the Pearl River Delta as a target market with group CEO Stuart Gulliver saying that he will hire 4,000 staff to bolster the business. More specifically, HSBC Private Bank is focusing on “serving the personal wealth management needs of the leadership and owners of the group’s corporate clients”, in the words of Gulliver. This strategy is well-evidenced by the recent appointments of Greater China corporate banking heavyweight Ivan Wong as

INDUSTRY

Rank

Change

Bank

Asia (ex-China onshore) AUM (US$bn) 2016

2015

2015-2016 YoY %

2012-2016 CAGR %

1

-

UBS Wealth Management

286.4

274

4.5

8.5

2

-

Citi (incl. Gold, Private Client and Private Bank)

218

210

3.8

0.9

3

-

Credit Suisse Private Banking

163.8

150.4

8.9

7.9

4

-

HSBC Private Bank

108

112

-3.6

4.4

5

-

Julius Baer

82.4

75.1

9.7

17.7

6

-

DBS (incl. Treasures Private Client and Private Bank)

81.2

75

8.3

15.3

7

↑4

Bank of Singapore

79

55

43.6

16.4

8

↑2

BNP Paribas Wealth Management

74

64.5

14.7

15

9

↓2

Morgan Stanley Private Wealth Management

71

72

-1.4

5.2

10

↑2

Goldman Sachs Private Wealth Management

70

59

18.6

16.9

11

↓2

J.P. Morgan Private Bank

68

65

4.6

5

12

↓3

Deutsche Bank Wealth Management

47.4

53.7

-11.7

-13.4

13

-

Standard Chartered Private Bank

45

45

0

6.5

14

NEW

UOB Private Bank

32

26

23.1

N/A

15

-

LGT

29.1

25.4

14.6

15.4

16

-

Hang Seng Private Bank

25

25

0

7.1

17

NEW

BOC(HK)

25

N/A

N/A

N/A

18

↓1

EFG Private Bank

22

20

10

4.4

19

-

J. Safra Sarasin

15.3

15.3

0

4.4

20

NEW

Union Bancaire Privée

11.8

0.774

1424.5

N/A

Total

1,554.4

1,464.4

its regional head of investment services and product solutions (in late 2015) and Siew Meng Tan as a regional head of private banking (from the commercial bank in 2016).

Standard Chartered Private Bank, Deutsche Bank Wealth Management Standard Chartered Private Bank’s global profits slipped from US$99 million in 2015 to US$32 million in 2016 and client asset growth in Asia remained flat over the same period. This follows a major regional exercise that included the successful acquisition of renowned private banking veteran, Vivian Chan, and the restructuring of various parts of the business. One challenge the regional private bank faces is stability in management. Standard Chartered Private Bank has already gone through its third CEO in less than a decade.

Deutsche Bank Wealth Management faces similar challenges. At the group level, the bank posted a €1.4 billion loss for 2016 and announced that its managers would not receive individual bonuses for the year. In addition, the wealth management unit has suffered from a lack of stability after merging with the bank’s asset management arm in June 2012 before breaking up again in October 2015. Key leadership exits in 2016 will have put further strain on the business. Deutsche Bank is now planning to list the asset management arm to raise capital and bolster its balance sheet.

Union Bancaire Privée UBP received a shot in the arm from its Coutts acquisition, effectively boosting AUM in the region from US$774 million in 2015 to US$11.8 billion in 2016. Since the acquisition, the bank has pared back operating costs and embarked on a slew of hires to bring in further assets. UBP’s leadership has set out some ambitious growth targets that include growing AUM from CHF 12 billion to CHF 15 billion in the short term and raising the Asian private banking business’s contribution to group revenues from 10% to 15-20%. Hiring alone may not be enough and, going

by UBP’s track record, another acquisition could be on the cards.

UOB Private Bank The quietest of the Singaporean triumvirate, UOB Private Bank has steadily grown its client assets by 50% and more than doubled revenues since September 2013. Under the leadership of Ong Yeng Fang (head) and Neo Teng Hwee (CIO) – both Julius Baer alumni – UOB established a discretionary portfolio management offering in 2016 and, according to Ong, is targeting a funds and DPM penetration rate of “40-50%”. With DBS and Bank of Singapore both acquiring in recent years, UOB Private Bank is looking to follow suit, although caution remains the mantra.

ASIAN PRIVATE BANKER

13

INDUSTRY

2016 RM Headcount League Table Asia’s (ex-China onshore) private banks welcome 256 new RMs in 2016 In 2016, Asia’s (ex-China onshore) Top 20 private banks by relationship manager (RM) headcount saw their collective frontline increase by 6.9% YoY, from 5,203 to 5,459, following a 50 person net decline in 2015.

UBS Wealth Management once again tops the chart as the region’s largest employer with an army of 1,016 RMs in Asia, despite posting a 7% YoY decrease in total headcount. Rival Credit Suisse Private Banking finished a distant second, rounding out the year with 640 RMs, up 10.3% YoY. The Swiss bank added 30 bankers in the first quarter of 2016 and by Q3, its headcount was 100 RMs higher in YoY terms. HSBC Private Bank held onto its number three ranking with 470 RMs, representing a 6.8% YoY increase.

The biggest frontline boost was experienced by Union Bancaire Privée (UBP) following its acquisition of Coutts International which closed in 2016. RM numbers at the Swiss pure play jumped 415.4% to 67 – sufficient to rank it 19th in the region.

In terms of organic growth, UOB Private Bank saw an impressive 98.4% increase in its RM headcount, from 63 to 125 in 2016. But it was Julius Baer that took the crown as the industry’s most aggressive hirer last Rank

Change

year. The Swiss bank’s RM headcount rose by 40.7% to 380, pushing it from 9th to 5th on the League Table. The Swiss bank added in excess of 100 bankers in Asia alone, and added another floor to its Hong Kong office in the process.

Among the three private banks that saw their RM headcount fall, Morgan Stanley Private Wealth Management posted the largest drop, from 275 in 2015 to 247 in 2016.

AUM per RM up The average AUM per RM for the Top 20 private banks by RM headcount has also increased to US$298.3 million in 2016, up from US$282.4 million in 2015.

Goldman Sachs Private Wealth Management tops the table with US$769.2 million AUM per RM, followed by Citi (US$670.8 million AUM per RM), J.P. Morgan Private Bank (US$503.7 million AUM per RM), Hang Seng Private Bank (US$416.7 million AUM per RM) and Morgan Stanley Private Wealth Management (US$287.4 million AUM per RM).

Five hiring trends of 2016 In broad strokes, five hiring trends dominated Asia’s private banking industry in 2016.

Bank

Asia (ex-China onshore) RM Headcount 2016

2015

2015-2016 YoY %

1

-

UBS Wealth Management

1016

1092

-7.0%

2

-

Credit Suisse Private Banking

640

580

10.3%

3

-

HSBC Private Bank

470

440

6.8%

4

↑1

Bank of Singapore

396

314

26.1%

5

↑4

Julius Baer

380

270

40.7%

6

-

Standard Chartered Private Bank

341

300

13.7%

7

↓3

Citi (incl. Gold, Private Client and Private Bank)

325

325

0.0%

8

↓1

DBS (incl. Treasures Private Client and Private Bank)

300

289

3.8%

9

↑1

BNP Paribas Wealth Management

270

248

8.9%

10

↓2

Morgan Stanley Private Wealth Management

247

275

-10.2%

11

-

Deutsche Bank Wealth Management

200

200

0.0%

12

↑3

EFG Private Bank

140

120

16.7%

13

-

J.P. Morgan Private Bank

135

135

0.0%

14

NEW

UOB Private Bank

125

63

98.4%

15

↑2

LGT

106

85

24.7%

16

-

Goldman Sachs Private Wealth Management

91

95

-4.2%

17

NEW

J. Safra Sarasin

78

65

20.0%

18

NEW

Indosuez Wealth Management

72

60

20.0%

19

NEW

Union Bancaire Privée

67

13

415.4%

20

↓1

Hang Seng Private Bank

60

50

20.0%

Total

5,459

5,203

14

ASIAN PRIVATE BANKER

INDUSTRY

Greater China bankers in hot demand The first half of 2016 saw high demand for Greater China bankers, with notable talent flows between Julius Baer and Credit Suisse. Julius Baer added David Shick, Edward Chow and Eric Kong, while Credit Suisse claimed veteran banker Stella Kong. Standard Chartered Private Bank made news later in the year with the marquee hire of industry heavyweight Vivian Chan.

Onshore/offshore split The focus then shifted to Southeast Asia and relationship managers with experience servicing Singapore, Malaysia, Indonesia, Philippines and Thailand found themselves in hot demand. Even so, many banks struggled to find suitable Singapore-based talent, and instead looked onshore – most notably in the Philippines and Thailand – to poach frontliners from established domestic players to cover the offshore markets.

The global Indians strategy Arguably the most promising NRI strategy to emerge out of the foreign private banking space has been the ‘global Indians’ concept – effectively a clubbing together of the India onshore and non-resident Indian (NRI) segments. Both BNP Paribas Wealth Management and Julius Baer have adopted the approach on the grounds that it is an effective strategy to service NRI clients with a strong propensity for investing in India as well as Indian HNWIs with families abroad. More recently, Credit Suisse announced that Balakrishnan Kunnambath would oversee its India private banking business, all the while retaining his role as market group head for NRI APAC and Indian sub-continent, based in Singapore.

International desks dismantled Regulatory pressures – headlined by the OECD’S Common Reporting Standard regime – have prompted private banks to disband their international desks, creating employment headaches for expat bankers in the process. ABN AMRO Private Banking lost its North Asia head of international clients, Feroze Sukh, along with a team to J. Safra Sarasin, and the Dutch private bank subsequently dismantled its Singaporebased international team in August 2016 before being sold to LGT. More recently, UBS Wealth Management launched a foreigners resident desk which, while outwardly similar in concept to an international team desk in the sense that it segments and targets clients from different countries, steers clear of CRS-related woes by servicing Singaporedomiciled clients only.

IAMs lure bankers The number of private bankers looking to set up or join independent asset managers (IAMs) is on the rise; and given compliance burdens and the decline of transparent, formula-based compensation models, this trend is expected to continue. Notable names from the industry that have gone on to set up their own IAMs in recent times include former Julius Baer heads, Kenneth Ho and Richard Hu. Similarly, three former UBS senior management executives, Peter Tung, Valerie Chou and Johan Riddergard, made headlines when they officially launched Lioncrest Global in Hong Kong last November. Industry reports estimate that Asia’s IAM industry will more-than-double its AUM to US$55-60 billion by 2020, at a CAGR of nearly 17%.

ASIAN PRIVATE BANKER

15

INDUSTRY

AUM per RM up in 2016, Goldman Sachs PWM tops the table

T

he average AUM per relationship manager (RM) for the Top 20 private banks by RM headcount increased to US$298.3 million in 2016, up from US$282.4 million in 2015, going by data from Asian Private Banker’s 2016 AUM and RM Headcount Tables.

Four American lenders ranked in the top five private banks in terms of AUM per RM. Unsurprisingly, Goldman Sachs Private Wealth Management topped the table with US$769.2 million of AUM per RM. The American lender banks UHNW clients with US$100 million or more in investable assets.

UHNW clients are also known to bank with fewer RMs and therefore RMs are more likely to have bigger books.

Coming in at second was Citi with US$670.8 million of AUM per RM, followed by J.P. Morgan Private Bank (US$503.7 million), Hang Seng Private Bank (US$416.7 million) and Morgan Stanley Private Wealth Management (US$287.4 million).

It was also unsurprising to see Hang Seng Private Bank edging its way into the top five, given the scalability of the bank’s client base, which largely consists of local investors.

experience of each RM also need to be gathered to “understand why some banks are able to achieve such high AUM per RM”.

“Throw in profitability data and you will also get a picture of whether these banks with high AUM/RM are profitable,” the consultant said.

Bank

RM headcount 2016

2016 Asia AUM (US$bn)

AUM per RM (US$mn)

1

Goldman Sachs Private Wealth Management

91

70

769.2

2

Citi (incl. Gold, Private Client and Private Bank)

325

218

670.8

3

J.P. Morgan Private Bank

135

68

503.7

4

Hang Seng Private Bank

60

25

416.7

5

Morgan Stanley Private Wealth Management

247

71

287.4

6

UBS Wealth Management

1,016

286.4

281.9

7

LGT

106

29.1

274.5

Meanwhile, despite a year of heavy hiring, underscored by the hiring of Vivian Chan last year, Standard Chartered Private Bank was ranked 20th with US$132 million of AUM per RM.

8

BNP Paribas Wealth Management

270

74

274.1

9

DBS (incl. Treasures Private Client and Private Bank)

300

81.2

270.7

Bigger books, better productivity?

10

UOB Private Bank

125

32

256.0

11

Credit Suisse Private Banking

640

163.8

255.9

12

Deutsche Bank Wealth Management

200

47.4

237.0

13

HSBC Private Bank

470

108

229.8

14

Julius Baer

380

82.4

216.8

15

Bank of Singapore

396

79

199.5

16

J Safra Sarasin

78

15.3

196.2

17

Union Bancaire Privée

67

11.8

176.1

18

Indosuez Wealth Management

72

11.6

161.1

19

EFG Private Bank

140

22

157.1

20

Standard Chartered Private Bank

341

45

132.0

While it is tempting to use the AUM per RM data as a barometer for the efficiency and productivity of private banks’ RMs, industry experts caution against this, noting that it is a crude measure at best, and a number of other factors must be accounted for first.

“The AUM per RM data does not reflect varying RM seniority, minimum client AUM threshold, digital capabilities made available to the RM, team-based approaches that involve direct-access client desks for some and investment advisors for others, and the size of the institution itself,” one private banking consultant said on the basis of anonymity.

“It is unsurprising to see those private banks – Goldman Sachs Private Wealth Management, J.P. Morgan Private Bank, Citi – topping this chart given their high minimum AUM threshold.”

Another consultant adds that for a more holistic view on productivity and efficiency per banker, data on the average tenure and years of

16

ASIAN PRIVATE BANKER

r e gulat i o n s

MAS gets tough on AML, launches partnership with local police

T

he Monetary Authority of Singapore (MAS) has launched a new oversight body to aid its efforts in combatting money laundering and terrorism financing.

The Anti-Money Laundering and Countering the Financing of Terrorism Industry Partnership (ACIP) is a government-industry partnership involving the Commercial Affairs Department (CAD) of the Singapore Police Force and eight major banks, including DBS, UOB, OCBC, Citibank, HSBC, Standard Chartered, UBS, BNP Paribas.

Ong Chong Tee, deputy managing director of MAS, will co-chair the partnership’s steering group together with the CAD. Ong said rigorous enforcement of anti-money laundering and terrorist financing regulations was required on the part of the industry.

Failures in this regard “can happen especially if a financial institution’s governance and culture fall short and appropriate due diligence is overlooked in lieu of business motivations”.

“The MAS will take tough enforcement actions for breaches of our regulatory requirements. Where laws are broken, we will also not hesitate to refer these to the law enforcement agencies for investigation and prosecution,” Ong said.

MAS centralised its enforcement function into a single department last year, as suspected illegal fund flows might “cut across different types of entities in our financial sector”.

CAD director David Chew said financial crime typologies “are evolving rapidly”.

“Countries must explore smarter and more effective ways to combat such crimes. ACIP will be a key enabler in this endeavour,” Chew said.

Asian Private Banker’s prior coverage of MAS’ AML endeavours showed that more focus on enforcement has been expected.

DISCRETIONARY PORTFOLIO MANAGEMENT LEADERS CONVERSATION Win more discretionary mandates from Asia-based clients

May 30, 2017 | Singapore June 1, 2017 | Hong Kong

www.apb.news/dpmlc2017

This event qualifies for CPT/CPD accreditation.

RSVP to Koye Sun koye.s@asianprivatebanker.com / +852 2529 0617 ASIAN PRIVATE BANKER Conversation Partners

17

ADVERTORIAL

Asia ex-Japan equities: With better yields and better upside, why keep concentrated holdings in low-risk bonds amid interest rate normalisation?

With a strong earnings per share (EPS) growth outlook, supportive economic indicators and an increasingly attractive relative value versus bonds, Asia ex-Japan equities are not only the strongest they have been in six years but are also a viable alternative for income with promising upside potential.

Stage is set for regional earnings growth Frank Tsui, Fund Manager at Value Partners, believes the stage is set for global equity markets given a robust EPS growth outlook.

Indeed, analysts have gone so far as upgrading post-earnings EPS projections for Asia exFrank Tsui, Japan equities from +12% to +15% (the first Fund Manager, such upgrade since 2010), a clear sign of Value Partners market-wide optimism, while the Producer Price Index (PPI) is signalling reflation which will have a delayed contribution to positive earnings figures.

“This is very constructive for equity investors,” Tsui says, alluding to headwinds that risk assets have faced in recent years. “We were at an inflection point last year, especially after Trump’s US election victory.

After the global financial crisis, investors became used to a low-rate, low-growth environment and have been trying to squeeze whatever returns are left in the fixed income market.”

After resistance from Congress to pass a new healthcare bill, onlookers are even more optimistic that the new US administration will successfully push through either one or both of the two other major campaign promises of tax cuts and increased fiscal spending— both of which if successfully implemented will continue to support the reflationary environment.

Asia ex-Japan equity in spotlight Within the equity allocation, Tsui is particularly bullish on Asia exJapan, not only due to stronger long-term growth prospects, but also the sector’s attractive high yield component - a critical factor for bondbiased investors who pursue yield with vigour.

Currently, companies in the Asia ex-Japan benchmark are registering high cash levels (the cash to market cap ratio is more than 20%) and low net debt to equity ratios (around 20%), while earnings growth prospects remain intact.

Even so, risk-averse investors are questioning just how a strong US dollar will impact equity markets, especially when considering a track record of Asian outflows to the US. “The question of how an interest rate hike could impact equities is more complex than people think,” Value Partners’ Tsui explains.

“Yes, historically, dollar strength is negatively correlated with Asia exJapan equities, but we have to dig deeper down to really see the cost of interest rate pick up on the US dollar.”

First, fundamentals in Asia today are better-placed to withstand dollar strengthening and regional economies and their current accounts are capable of absorbing the effects of dollar strengthening.

Second, the US Federal Reserve (the Fed) is increasing rates, not because of high inflation, but because growth recovery is underway.

Absent inflationary pressures, the Fed is unlikely to hike too aggressively and moderate rate normalisation tends to have a positive effect on Asia ex-Japan equities.

Global investors are already moving to reallocate, showing no fear during this rate hike cycle. After the Fed Chairman Janet Yellen hiked rates in March for the third time during her term, more than US$8 billion flowed into Asia ex-Japan equity markets, propelled by momentum and fundamentals. Tsui adds that the Shanghai market slump in 2015 was punishing and that it historically takes up to a couple of years for sentiments to recover when markets plunge 3040%, but the tide may have turned.

The views expressed are the views of Value Partners Limited only and are subject to change based on market and other conditions. The information provided does not constitute investment advice and it should not be relied on as such. Information in this material has been obtained from sources believed to be reliable as of the date of presentation, but its accuracy is not guaranteed. This material contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

18

ASIAN PRIVATE BANKER

A D VER T ORI A L

Asia equity dividends: Better yields than bonds, better upside than market beta “Yield-seeking will remain as the mainstream behavioural trait amongst investors,” Tsui reiterates, illustrating the potential of Asia ex-Japan equities as an alternative income source in addition to the sector’s strong capital appreciation potential.

With relatively high cash levels and low debt obligations, shareholders of companies from the region are well-positioned to receive an increasing level of dividends. Moreover, dividend yields are already at elevated levels relative to fixed income markets. Currently, the MSCI Asia Pacific ex-Japan High Dividend Yield Index is yielding ~5% while the JP Morgan Asia Credit Composite Index (JACI) is yielding ~4.5%, as of 20 March 2017. Meanwhile, rising interest rates could place further pressure on fixed income proxies like investment grade bonds.

The regional high yield equity benchmark’s resilience is noteworthy, especially for those contending that investors could instead adopt a full risk-on approach in a reflationary environment. On top of closely tracking the broader Asia ex-Japan benchmark, the MSCI Asia exJapan High Dividend Yield Index outperformed the MSCI Asia ex Japan Index during the last cycle when net debt ratios were higher and cash levels were lower. Interestingly, dividends constitute two-thirds

of the total returns of the MSCI Asia Pacific ex-Japan Index over the past decade.

Despite the market’s strength, it is imprudent to simply buy the whole index, with the relative value of its constituents demanding bottomup capabilities. This is due in part to the benchmark’s high exposure to the financial sector regionally. Value Partners believes that the bottom-up approach offers greater flexibility for fund managers to pick companies which are able to generate better earnings and produce more consistent free cash flow.

On a regional basis, Tsui is overweight on North Asia and, in particular, Greater China and South Korea, while on a sectoral basis, he is bullish on real estate, industrials, consumer discretionary and IT hardware.

With an environment conducive to capital appreciation, backed by outperforming dividend yields driven by healthy cash flow positions, Tsui’s advocacy for the market is based on a simple yet fundamental premise: “Why invest in a low-risk bond instrument (paying 4.5% yield with increasing duration risk) when you can invest in sound dividendpaying equities (with a 5% yield and potential for appreciation)?” www.valuepartners-group.com

ASIAN PRIVATE BANKER

19

A P B M A N DAT E

Gold allocations to ‘gain momentum’ in Asia this year

W

ith Asian investors becoming increasingly sophisticated, private banks in the region expect investors will allocate more towards alternatives such as gold in order to diversify their portfolios.

According to a report by East & Partners Asia, Asia’s high net worth individuals (HNWIs) are moving away from their long-held focus on property, with allocations towards property dropping to 32.2% last year, from 40% three years ago.

“Longer term, we do see a higher allocation in portfolios to gold here in Asia, particularly in China as they [investors] seek to diversify current holdings into other assets, like gold,” says Wayne Gordon, commodities analyst, CIO office, UBS Wealth Management.

This shift was accompanied by an uptick in allocations to alternative assets (15.1% of allocations last year from just 8% three years ago).

“In recent years, due to more economic and political uncertainties, sophisticated investors tend to view gold from an asset allocation perspective,” says James Cheo, investment strategist at Bank of Singapore.

Asian investors tend to be less professional and sophisticated in their strategies compared with their counterparts in Western economies, experts say. Asian investors usually have high return expectations and invest relatively large portions of their portfolios into single assets, such as property. “[Asian investors] often try to time the market, find out what the hottest trend is, pick the hot stocks, the hot industries, or the hot sectors,” Scott Pappas, investment analyst at Vanguard, tells Asian Private Banker. Pappas says investors in the region are often focused on the short-term when making investments.

However, in recent years, a noticeable improvement has been seen in Asian investors’ investment behaviours and decisions, particularly in the wake of the global financial crisis.

As a diversifier and hedge within the realm of alternatives, gold’s strategic value in both times of market stress and prosperity is gradually being recognised by Asian investors.

“The reason why gold has been an attractive long-term asset is that it works very well within different business cycles,” says Robin Tsui, vice president, ETF gold specialist, State Street Global Advisors. “During an economic downturn, it is a hedge against uncertainties; during economic growth, it is a hedge against inflation.”

Gold to gain momentum amid uncertainties?

Political headwinds from Europe are yet to clear. France will elect a new president soon, with Marine Le Pen going head to head with Emmanuel Macron in the final round. Meanwhile, the Greek debt saga could soon be back in the spotlight.

In addition, uncertainties surrounding US fiscal and political policies under Trump’s administration are also likely to keep financial markets volatile.

“We still are favourable to gold on dips as a hedge to geopolitical uncertainty ahead from both sides of the Atlantic,” says Davis Hall,

1 YEAR GOLD SPOT PRICE May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Apr

1,300.00 1,250.00 1,200.00 1,150.00

04/07 1,262.00 Source: Bloomberg

20

APB MANDATE

A P B M A N DAT E

global head of foreign exchange and precious metals advisory at Indosuez Wealth Management.

Cheuk Wan Fan, head of investment strategy and advisory for Asia at HSBC Private Bank, echoes this sentiment: “We expect gold prices would gain from geopolitical and policy risks, as well as the rising protectionist sentiment, which will support strong safe haven demand for gold in 2017.” Fan tells Asian Private Banker that HSBC Private Bank considers gold a core holding in well diversified multi-asset portfolios in the long term.

A ‘dovish’ tightening trajectory in the US Tightening monetary policies, and the stronger US dollar, triggered a pullback in gold prices late last year. The gold spot price slumped to US$1,133 in December from US$1,302 in early November, but has since risen to US$1,262.8 (on 7 April 2017).

Fan expects fading concerns surrounding the Fed’s policies, and strong safe haven demand, to become more important drivers of gold prices in coming months.

“The slow and shallow rate hikes should cap the extent of further USD appreciation and provide support for gold price stabilisation.”

UBS WM’s Gordon says: “Uncertainty over French elections is goldsupportive short term, but the most powerful drivers are negative real US interest rates and our view of a weaker USD on a six and 12 month basis.”

Physical gold or gold ETFs? Physical gold provides the most direct exposure to this asset, and this approach is relatively popular in Asia. Gold-backed financial instruments, such as gold ETFs, ETNs, and gold mining stocks, have however been gaining momentum in recent years as they are easy to trade.

“Most HNWIs in the region buy tangible gold for long-term investment,” says Nigel Paxman, president of Malca-Amit, a global logistics and storage provider for bullion, precious gems and other related physical assets.

“They [HNWIs] will move into stocks, shares, bonds by themselves, but if they buy gold bullion for safety and long-term reasons, they are far less likely to trade them.”

Malca-Amit launched a HNWI-targeted safe depository service in May last year, called UltraVault. Paxman tells Asian Private Banker that most HNWIs storing in Asia are storing gold and jewellery.

HNWIs storing gold are usually storing small gold bars and coins.

Paxman says that based on the HNWI business’s rapid growth in the region over the past two years, especially in Singapore and Hong Kong, he expects the business will triple its income by 2019.

Still, Bank of Singapore’s Cheo believes there is a growing trend in the region towards investing in gold through ETFs. He points out that 2016 was the second best year for gold-backed ETFs on record, while physical demand for gold was subdued for most of last year.

Inflation to justify gold allocations Central banks globally have poured trillions of dollars into markets since the financial crisis to combat deflation, and there are now a number of signs that their efforts are paying off, with favorable inflation numbers being one of them.

“Ongoing QE and currency debasement, however, are solid longterm factors to justify an allocation against the next black swan,” says Indosuez’s Hall.

Bank of Singapore’s Cheo says “deflationary risk is fading fast and inflationary pressures are on the rise globally amidst stronger economic growth”.

“The reason for investors’ preference to use gold ETFs is primarily because of the ease and lower transaction and storage cost associated with ETF investing as compared to physical gold,” says Cheo.

State Street’s Tsui agrees: “While physical gold is still a big portion in Asia, over the last few years, especially since 2009, as investors get more educated and sophisticated about the different options of investing in gold, the capital inflow to gold ETFs has been significantly rising.”

Tsui expects private banks will consider gold a strategic portfolio allocation moving forward.

Bitcoin to challenge gold?

“In the US, the economy is already at full capacity and the Fed is expected to continue to tighten its monetary policy. If Trump were to enact his fiscal thrust, it will only add more inflationary pressure into the global economy.”

Cheo believes that as long as there is a growing perception among investors that inflation could continue rising, demand for gold could lift.

In terms of gold price forecasts, Bank of Singapore maintains a “kinked profile” for the gold price, and expects a price of US$1,290 in three months’ time and US$1,150 in 12 months, with the latter price reflecting the risks of a pullback as political risks subside and the Fed steps up its rate hikes. UBS, meanwhile, forecasts the yellow metal price at US$1,300 on a three, six and 12-month basis.

Bitcoin, the digital currency that uses encryption, is starting to challenge gold as the number of Bitcoin transactions rises.

According to data, on 3 March 2017, Bitcoin’s price reached a record high and overtook gold for the first time, trading at US$1,290 compared with US$1,228 for an ounce of gold.

However, Asia’s private banks expect that the digital currency is unlikely to challenge gold’s “sacred” status. “For now, bitcoins are not the liquid antidote whatsoever,” says Indosuez’s Hall.

This is echoed by Cheo, who believes Bitcoin, which is a recent invention and has not been tested by history, cannot be compared with gold in the same light.

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A P B M A N DAT E

AM Heat Map: Fixed income fund traffic tilts towards Asia and EM

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number of developments concerning the Fed sent 10-year Treasury yields back to the lows seen in November 2016, while emerging markets (EM) – particularly those in Asia – appear more capable than ever to withstand USD strengthening, albeit at gradual levels.

Recent traffic data suggests that fixed income fund distribution within Asia could be tilting in favour of regional and EM bonds over global high yield bonds.

APB Mandate seeks forward-looking trends in its latest Asset Management Heat Map, an exclusive weekly column analysing regional fund demand based on internet traffic data provided by fundinfo.

Asia and EM bond fund traffic shares hold up After peaking at around 2.63% in mid-March, a more dovish than expected Fed and a reversal in Trump’s stance on monetary policy sent US 10-year Treasury yields to around 2.2-2.3%.

Despite lower US yields and the prospect of a more gradual rate hike cycle – not to mention a potential reappointment of Fed chair Janet Yellen – fund traffic data in Asia indicates that interest in high yield bonds has waned. Against this weakened interest, Asia and EM bonds have fared better than other high yield bonds.

Since March 2017, the fund traffic share weightings of select peer groups within fixed income have significantly shifted (according to the latest 1-year, 1-week rolling data).

World High Yield Bond (multi-currency) traffic share has plummeted 22.4% while the share of USD high yield bonds fell 7.7%.

In comparison, the traffic shares of Asia Pacific External Debt (Multicurrency) and EM Bond (multi-currency) funds have fared better, declining just 1% and 2.6%, respectively.

between November 2016 (Trump’s election victory) and March 2017 respectively. Over the same period, APAC External Debt and EM Bond funds lost 36.9% and 29.5%, respectively.

For the more courageous “Without doubt, within the fund space, the majority of the fixed income flows from the last 18 months have gone into core, flexible, unconstrained funds with more global mandates – clients buying these funds would have enjoyed robust performance from most strategies in 2016,” says Ben Cherrington, head of intermediary channels, APAC, M&G Investments.

Although Cherrington is wary that geopolitical risks could dent market sentiment, while perceptions remain that EM bonds are exposed to a stronger USD, he notes that there are gains to be made by “courageous clients prepared to absorb short term spikes in volatility for medium- to long-term outperformance”.

Interestingly, aggregate bond funds were another category that saw either sustained or increased traffic share over the period. World Aggregate Bond fund traffic share held at around 29-30% while USD Aggregate Bond fund traffic share surged 67.9% to represent 6.67% of total traffic.

“As risk appetite slowly returns, the obsession with capital preservation eases; combined with steady 2016 performance, plus a natural local bias, Asian HNW investors are definitely more open to conversations relating to Asian and EM credit,” he says.

“Additionally, rich valuations and compressed yields in the developed market space almost force Asian clients hungry for income to increase their allocations to Asian and EM credit.”

APB Mandate shares its weekly view on the state of fund demand within the private banking industry from both a regional and global view.

Prior to their declines, the two aforementioned traffic losers had recorded strong gains in traffic share, with 57% and 174% increases FUND PEER GROUP

MAY 12, 2017

APRIL 16, 2017

World, Aggregate (Bond / Multi Currency)

29.8%

31.3%

USD Aggregate (Bond / Single Currency)

4.0%

6.7%

World High Yield (Bond / Multi Currency)

24.4%

18.9%

USD High Yield (Bond / Single Currency)

13.1%

12.1%

Asia/Pacific External Debt (Bond / Multi Currency)

8.3%

8.2%

USD Aggregate (Bond / Single Currency)

4.0%

6.7%

Emerging Markets (Bond / Multi Currency)

3.9%

3.8% APB MANDATE

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r e gulat i o n s

SFC launches ‘manager in charge’ programme

H

ong Kong’s Securities and Futures Commission (SFC) launched its manager in charge (MIC) programme this month, meaning all licensed companies must name their senior managers in charge of eight core functions by July as part of their licensing requirements.

According to an unnamed bank representative, the MIC scheme should make senior managers more aware of their responsibilities, however it is unlikely to result in a substantial change in managers’ liabilities. Banks have already made preparations for the changes, the person said.

“We want to highlight the point that even if you’re not a licensed person or a responsible officer, by being directors of a licensed company and manager in charge of core functions, you are under SFC’s regulation,” the regulator said.

The regulator’s focus is on those managers who have “sufficient authority and are closely involved in managing the day-to-day operations of a licensed company”.

Under the new scheme, a manager in charge is subject to civil liabilities related to the misconduct of their licensed company if investigations prove that the person is responsible for the misbehaviour.

Criminal liabilities, meanwhile, remain unchanged from existing company laws.

The MIC programme has received overwhelming attention from the industry, with more than 3,000 people attending the 12 sessions of an industry workshop held between February and April. The SFC said attendees were mostly the staff of banks, brokerages and industry associations.

As Asian Private Banker reported last month, SFC is the first Asian regulator to adopt such a regime, while the UK’s Financial Conduct Authority (FCA) introduced a similar framework in July 2015.

The MIC programme requires licensed companies to submit and regularly update the information relating to persons in charge of eight core functions, from frontline to back office. The functions include: overall management oversight, key business line, operational control and review, finance and accounting, risk management, information technology, compliance, anti-money laundering and counterterrorist financing.

Singapore regulators likely to become “more active” in AML space, says law firm

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egulators in Singapore are likely to step up their scrutiny of banks’ anti-money laundering (AML) procedures following a series of high profile cases in recent years, according to an international law firm.

“I don’t see it as Singapore racing to catch up – the regulations are already there – but I think we will see more activity by the MAS [Monetary Authority of Singapore],” Jo Pearson, partner at Simmons & Simmons, told Asian Private Banker.

In the wake of scandals relating to the Panama Papers, Malaysian state development fund 1MDB, and the “Russian Laundromat”, AML enforcement has become an imperative for regulatory bodies around the world – including in Asia’s key financial hubs of Singapore and Hong Kong.

The 1MDB case prompted MAS to flex its muscles and enforce its AML laws for the first time last year, some time after MAS’s counterpart in Hong Kong first acted on these regulations.

“In Hong Kong, there has been some enforcement activity around AML failures. In the State Bank of India case, a couple of years ago,

the compliance systems around AML were found to be inadequate, and the bank was fined,” says Pearson.

The Hong Kong Monetary Authority (HKMA) has indicated its willingness to stay on top of AML breaches, having published guidance documents and made “statements around enhanced scrutiny in the area”.

“I think we will continue to see enforcement action against institutions that have not bolstered their control adequately in all key jurisdictions, including Singapore,” Pearson says.

The Financial Action Task Force (FATF), an inter-governmental body, said in a report published in September last year that Singapore had a “low” effectiveness and technical compliance rating when it came to “investigating and prosecuting” breaches in AML and counterterrorist financing (CTF).

In the 10 other categories, Singapore scored either “moderate” or “substantial” ratings.

Hong Kong’s on-site AML/CTF evaluation by the FATF is scheduled for October-November next year.

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